Are Microsoft’s disappointing gaming earnings tied to Fortnite slump?

Microsoft’s recent fiscal results were healthy, but there was one blot on the landscape, and that came in the form of below-par gaming revenue – takings which have allegedly been dragged down by Fortnite’s slumping earnings.

In its fourth quarter (financial year 2019) results, Microsoft revealed that gaming revenue was down 10% year-on-year – crucially missing its own expectations – with gaming hardware down 48%, and gaming software and services (subscriptions) having dropped by 3% compared to the same quarter last year.

The latter is the point we’re most interested in here, and as The Motley Fool highlighted, Daniel Ahmad, a senior analyst at Niko Partners, reckons that a key third-party game which contributed to these lower sales was Fortnite. (Microsoft mentioned a detrimental third-party title, but without clarifying what it was).

So, assuming this is a correct assertion, how bad have things got for Epic’s battle royale juggernaut of late?

Levels of in-game spending in Fortnite have dropped considerably in recent times, and while the game still took $203 million (around £160 million, AU$290 million) in May, according to SuperData, that represented a 38% drop year-on-year. Revenue fell even more sharply back in January 2019 to the tune of 48% month-on-month.

Of course, the game is available across a raft of mobile and console platforms, but its player spend will clearly have an effect on Microsoft in terms of the Xbox version, where Epic has to give Microsoft a cut of its earnings (on the PC and Windows, Epic distributes Fortnite through its own store, of course).

How big an effect isn’t clear, because we simply don’t know the percentages and figures behind-the-scenes, but if Ahmad is right in his assertion, it would certainly make sense that a massive game such as Fortnite could pull gaming earnings down when having a bad time of it.

What does this mean for Microsoft? Well, there’s obviously not a great deal the company can do about it, other than hoping Epic can manage to stem any cashflow issues and reignite interest in its battle royale.

However, Microsoft certainly isn’t down about the future of gaming and the money it can make in this arena. In its financial results, the company did note that the drop in games software and service revenue was partially offset by increases in Xbox Live takings and Xbox Game Pass, the latter of which recently became available to PC gamers.

Cloudy future

CEO Satya Nadella sees these ‘fast-growing’ subscription services as the key to Microsoft’s future success, along with Project xCloud, Microsoft’s game streaming service that allows you to play anywhere on any device (and will hit its public testing phase later this year).

Nadella observed: “We are in gaming because of what we believe are going to be the secular changes in the gaming addressable market for us. We’ve always had a gaming position with console as well as the PC, but going forward, we think that any endpoint can, in fact, be a great endpoint for high-end games, which is where our structural position is.

“And we now have a business model with Game Pass as well as all the supporting mechanisms for Game Pass like game streaming. We have a social network in Xbox Live that is the best in the business. So, I feel that we are well positioned to what is going to be a much larger market than what was traditionally gaming, in spite of all the success we’ve had over the years in gaming.”

The nearer future, however, won’t be quite so rosy, what with Microsoft coming to the end of this Xbox generation, with the obvious implications therein for folks waiting for the new machines.

Talking about the current quarter, Microsoft CFO Amy Hood commented: “And in Gaming, we expect revenue to decline year-over-year at a similar rate to Q4 as we move through the end of this console generation and a challenging Xbox software and services comparable from a third party title in the prior year.”

Are Microsoft’s disappointing gaming earnings tied to Fortnite slump? 3

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